Euro and sterling strategy from Barclays
Barclays Capital expects EUR/USD to trade side-ways into year-end as the data calendar is light and event risks (eg, Fed, ECB) are behind us.
"Yet, we think 2016 will bring about another year of significant EUR depreciation with the Fed/ECB policy divergence taking centre stage. Longer-term euro area inflation expectations have once again declined following the December ECB meeting, and we continue to look for muted inflationary pressure over the forecast horizon," Barclays projects.
"Further, the EUR REER is close to its January levels, when the ECB first announced QE. We expect this will ultimately imply longer or greater policy accommodation that could push the EUR to a lower trough than we had previously forecast," Barclays argues.
Turning to GBP/USD, Barclays recommends selling the pair as its FX trade of the week(s) into yea-end. The trade is macro-technical driven
On the macro-front, Barclays' rationale is as follows:
"Slowing UK growth momentum should be confirmed in next week's final read of Q3 GDP, supporting our bearish sterling view in the context of impending fiscal tightening and EU referendum risk.
The only data to note for sterling over the next fortnight is the final read of UK Q3 GDP (23 December) which is widely expected to be confirmed at 2.3% y/y, a drop from 2.4% y/y in Q2 and 2.7% in Q1. Indeed, despite this week's upside surprise in November retail sales, we continue to expect further declines in UK growth momentum to a pace of about 2.0% y/y in Q4. Next year we forecast UK growth to fall further to 1.9% y/y as tight fiscal policy and EU referendum risk bit," Barclays projects.
"Our technical strategist would be encouraged by a break in GBPUSD below nearby targets in the 1.4855 area. Greater technical targets are towards 1.4565, the year-to-date lows," Barclays adds.
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